RCUS US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in this Annual Report. This discussion and other parts of this Annual Report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this Annual Report titled “Risk Factors.”

Overview

We are a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in multiple Phase 3 registrational studies targeting lung and gastrointestinal cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications. We expect our clinical-stage portfolio to continue to expand and to include molecules targeting immuno-oncology, cancer cell-intrinsic and immunological pathways. Our vision is to create, develop and commercialize highly differentiated therapies that have a meaningful impact on patients.

Significant Developments

The following is a summary of significant developments affecting our business since the filing of our Annual Report on Form 10-K for the year ended December 31, 2022:

Corporate Developments

•In January 2024, we amended the Stock Purchase Agreement with Gilead, pursuant to which Gilead made an equity investment of $320 million through the purchase of our common stock at $21.00 per share (the "2024 Gilead Financing").

•In January 2024, concurrent with the 2024 Gilead Financing, we amended the Investor Rights Agreement to, among other things, increase the number of individuals that Gilead may designate to be appointed to our board of directors to three.

•In May 2023, we amended the Gilead Collaboration Agreement to expand our collaboration with Gilead. Pursuant to this expansion, we will initiate up to four jointly selected research-stage programs against targets that are applicable to inflammatory diseases. For each research program jointly selected under this expansion, prior to the first anniversary of the amendment, Gilead receives an option to license such research program at two separate, prespecified time points. If Gilead exercises its option at the earlier time point for the first two research programs jointly selected, we would be eligible to receive up to $420 million in option and milestone payments as well as tiered royalties for each optioned program. For any other research program jointly selected under this expansion, if Gilead exercises its option, the parties would have rights to co-develop and share global development costs and to co-commercialize and share profits in the United States for optioned programs.

TIGIT Program

•In January 2024, we announced that we and Gilead have reprioritized the joint domvanalimab development program (the "2024 Reprioritization"). This reprioritization is intended to allow us to focus on domvanalimab-containing regimen research in settings with high unmet need where it may have significant impact, such as our Phase 3 studies STAR-121 (lung cancer) and STAR-221 (gastrointestinal cancer), which are both all-comer studies and are expected to be fully enrolled by year-end. The companies also plan to initiate STAR-131, a new registrational Phase 3 lung cancer study that includes the domvanalimab plus zimberelimab regimen.

•In January 2024, as part of the 2024 Reprioritization, we announced that we are discontinuing further enrollment in the Phase 3 ARC-10 study evaluating domvanalimab plus zimberelimab compared to pembrolizumab monotherapy in first-line locally advanced or metastatic PD-L1-high NSCLC.

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•In November 2023, we presented preliminary data from Arm A1 of the Phase 2 EDGE-Gastric study, evaluating domvanalimab plus zimberelimab and chemotherapy in patients with previously untreated, locally advanced unresectable or metastatic upper gastrointestinal cancers. These data were from the cohort that includes a similar patient population and dosing regimen as the ongoing Phase 3 study, STAR-221. As of September 4, 2023, the data cut-off for the analysis:

◦Domvanalimab plus zimberelimab and chemotherapy showed encouraging ORR of 80% (cORR of 73%) in patients with PD-L1-high tumors (TAP ≥5%), 46% (all confirmed) in patients with PD-L1-low tumors (TAP <5%) and 59% (cORR of 56%) for patients overall.

◦Six-month landmark PFS was 93% for patients with PD-L1-high tumors (TAP ≥5%), 68% for patients with PD-L1-low tumors (TAP <5%) and 77% for patients overall. Mature PFS has not been reached and data are expected in the second half of 2024.

◦Domvanalimab plus zimberelimab and chemotherapy was well tolerated, with a similar safety profile to what has been reported for anti-PD1 plus chemotherapy in this setting.

•In June 2023, we provided results from an interim analysis from ARC-7, our Phase 2 study in first-line metastatic PD-L1≥50% NSCLC. As of February 7, 2023, the data cut-off for the analysis, both domvanalimab-containing study arms demonstrated sustained, clinically meaningful improvements in PFS compared to zimberelimab monotherapy, with a 33% reduction in risk of disease progression or death for the doublet and 28% for the triplet.

Adenosine Program

•In January 2024, we announced overall survival data from ARC-8, our Phase 1b study in metastatic pancreatic cancer. In the announcement we disclosed that, as of June 19, 2023 (the data cutoff for the analysis), the median overall survival was 15.7 months for all patients treated with 100 mg quemliclustat-based regimens. Further, we announced that, in a post-hoc analysis of the data, patients treated with quemliclustat-based regimens showed a 37% reduction in risk of death and a 5.9-month improvement in median overall survival when compared to a Synthetic Control Arm of patients treated with chemotherapy alone.

•In January 2024, as part of the 2024 Reprioritization, we announced our plans for a Phase 3 study in first-line pancreatic cancer evaluating the investigational small molecule CD73 inhibitor quemliclustat that will be conducted and funded by Arcus.

HIF-2⍺ Program

•In December 2023, we announced that we entered into a clinical trial collaboration with Exelixis for STELLAR-009, a Phase 1b/2 trial evaluating zanzalintinib, Exelixis’ next-generation TKI, in combination with casdatifan, our small molecule inhibitor of the transcription factor HIF-2⍺, in patients with ccRCC. Exelixis is sponsoring STELLAR-009, and we are co-funding the study and providing casdatifan for use in the trial. Patient enrollment for STELLAR-009 opened before the end of 2023.

Strategic Partnerships

Gilead Sciences, Inc.

In 2020, we and Gilead entered into the Gilead Collaboration Agreement. Under the Gilead Collaboration Agreement, Gilead obtained an exclusive license to zimberelimab and time-limited exclusive options to all of our then-current and future programs during the 10-year collaboration term. In 2021, Gilead obtained rights to an additional four of our investigational products: domvanalimab, etrumadenant, quemliclustat and AB308. For each program to which Gilead exercised or exercises its option, the parties will co-develop globally and co-commercialize the program in the U.S., subject to certain exceptions, and Gilead will have the right to commercialize the program outside of the United States, subject to the rights of our existing partners in certain territories. Furthermore, we and Gilead agreed to collaborate on two oncology research programs, for which we will lead discovery and early development activities.

In 2023, we amended the Gilead Collaboration Agreement to further expand the collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities.

In 2024, we further amended the Gilead Collaboration Agreement to provide that (i) Gilead is required to pay the $100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement, and (ii) we would fund certain activities, including the Phase 3 study that we plan to initiate to evaluate quemliclustat in pancreatic cancer.

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Concurrent with the Gilead Collaboration Agreement in 2020, we also entered into the Stock Purchase Agreement and Investor Rights Agreement. Under the Stock Purchase Agreement, Gilead has the right, at its option until July 2025, to purchase up to a maximum ownership of 35% of our then-outstanding voting common stock. Under the Investor Rights Agreement, as amended, Gilead has the right to designate three individuals to be appointed to our board of directors. As of January 31, 2024, after including shares purchased in January 2024 under the Stock Purchase Agreement, Gilead held approximately 33.1% of our outstanding common stock.

Taiho Pharmaceutical Co., LTD.

In 2017, we entered into the Taiho Agreement pursuant to which Taiho was granted time-limited options to exclusively license for the Taiho Territory the development and commercialization rights to each of our programs that arose over a five-year period ending in September 2022. As of December 31, 2023, Taiho has licenses to (i) etrumadenant (the adenosine receptor antagonist program); (ii) zimberelimab (the anti-PD-1 program); and (iii) domvanalimab and AB308 (collectively, the anti-TIGIT program).

Other Licenses, Collaborations, and Research and Development Arrangements

We in-licensed rights to anti-PD-1 and CD39 antibodies from WuXi Biologics, and in-licensed rights to domvanalimab from Abmuno. We also have a clinical collaboration agreement with AstraZeneca for the PACIFIC-8 trial evaluating domvanalimab and durvalumab in Stage 3 NSCLC; Exelixis for the STELLAR-009 trial evaluating casdatifan and zanzalintinib in patients with ccRCC. We are also party to an agreement with BVF Partners L.P. ("BVF") to support the discovery and development of compounds for the treatment of inflammatory diseases.

Financial Overview

Since commencing operations in 2015, we have devoted substantially all of our efforts and financial resources to building our research and development capabilities, advancing our investigational product pipeline, and establishing our corporate infrastructure. To date, we have financed our operations primarily from the sale of our equity securities and payments received under our research, collaboration and license agreements with our strategic partners, including Gilead. We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of our investigational products and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs.

As of December 31, 2023, we had $866 million of cash, cash equivalents and marketable securities. Together with the $320 million we received from Gilead for their equity investment in January, 2024, our cash, cash equivalents and marketable securities were $1.2 billion, which we believe will be sufficient to fund our planned operations into 2027.

Components of Operating Results

Revenues

We have not generated any revenue from product sales and do not expect to generate any revenue from product sales for the foreseeable future. All revenue recognized to date has been through research, collaboration and license arrangements with strategic partners.

License and Development Services Revenue

Our license and development services revenue consists of amounts recognized from the portions of the nonrefundable upfront and milestone payments received from Gilead and Taiho and allocated to performance obligations for licenses or Research and Development ("R&D") activities performed by us as we develop our investigational products under the terms of our collaboration agreements. License and development services revenues are recognized based upon the timing of the delivery of a license or service if delivery is complete, or based on estimates of each performance obligation's percentage of completion at the period end if it is still in process. We calculate percentage of completion as a ratio of effort incurred to date on each performance obligation to the total estimated effort to be incurred to satisfy that performance obligation.

Other Collaboration Revenue

Other collaboration revenue consists primarily of amounts recognized from the portions of the nonrefundable upfront payments received from Gilead and Taiho and allocated to performance obligations relating to access to our investigational pipeline recognized over the period of access.

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Operating Expenses

Research and Development Expenses

Our research and development expenses consist of costs incurred in connection with the research and development of our pipeline programs. These expenses include preclinical and clinical expenses, payroll and personnel expenses, including stock-based compensation for our employees in R&D, laboratory supplies, product licenses, consulting costs, contract research, and depreciation. Shared facility expenses are allocated to functional groups proportionally based on usage. Under certain collaboration agreements we agree to share research and development expenses with our partners. Such cost sharing arrangements may result in receiving reimbursement from our partners or require that we reimburse our partners for qualified expenses. We expense both internal and external research and development costs as they are incurred. We record advance payments for services that will be used or rendered for future research and development activities as prepaid expenses and recognize them as an expense as the related services are performed. We recognize reimbursement for shared costs incurred by us and reimbursed by our partners as a reduction in research and development expense.

We do not allocate all our costs by investigational product, as a significant amount of research and development expenses include internal costs, such as payroll and other personnel expenses, and certain external costs that are not recorded at the investigational product level. In particular, with respect to internal costs, several of our departments support multiple research and development programs, and we do not allocate those costs by investigational product.

The level of our future research and development investment will depend on a number of factors and uncertainties, including the breadth of the joint development program agreed to with Gilead for the optioned programs, the outcome of our efforts, and the amount of cost reimbursements or milestone payments we receive from our collaborators. We expect our research and development expenses to increase substantially during the next few years as we pursue joint development programs with Gilead and advance these programs towards regulatory approval. We also expect to advance new programs into the clinic. All of this will require significant growth in our development capabilities and infrastructure. In addition, our joint development programs with Gilead for the optioned molecules are anticipated to include a significant number of later-stage clinical trials, which typically include a larger number of subjects, are of a longer duration and include more geographic regions. As we advance our clinical-stage programs and prepare to seek regulatory approval, we will also need to increase our late-stage manufacturing activities. As a result, we expect our preclinical, clinical, and contract manufacturing expenses to increase significantly relative to what we have incurred to date.

In addition, under our arrangements with WuXi Biologics, Abmuno, AstraZeneca and BVF, we may incur additional clinical and regulatory milestone payments based on the development progress of our investigational products. We may also be required to pay royalties in the event of a successful product launch and our receipt of commercial revenues. Therefore, we are unable to predict the timing or the final cost to complete our clinical programs or validation of our manufacturing and supply processes and delays may occur due to numerous factors. Factors that could cause or contribute to delays or additional costs include, but are not limited to, those discussed in “Item 1A. Risk Factors.”

General and Administrative Expenses

General and Administrative ("G&A") expenses consist principally of personnel-related costs including payroll and stock-based compensation for personnel in executive, finance, human resources, information technology, business and corporate development, and other administrative functions. Shared facility expenses are allocated to functional groups proportionally based on usage. Our G&A expenses also include professional fees for legal, consulting, and accounting services, rent and other facilities costs, fixed asset depreciation, and other general operating expenses not otherwise classified as research and development expenses. We do not receive significant reimbursements of these costs through our collaboration with Gilead.

We anticipate that our G&A expenses will increase during the next few years as we support our growing research and development activities, including due to staff expansion, and other costs associated with increased infrastructure needs.

Non-Operating Income, net

Non-operating income, net consists primarily of interest earned on our investments in fixed-income marketable securities and non-cash interest expense incurred under the effective interest method on our liability for sale of future royalties to BVF.

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Results of Operations

The following table summarizes our results of operations (in millions):

Revenues:

License and development service revenue $ 80 8 % $ 74 (79) % $ 345

Other collaboration revenue 37 (3) % 38 — % 38

Operating expenses:

Income (loss) from operations (340) 21 % (280) * 54

Non-operating income, net 39 179 % 14 * 1

Income (loss) before income taxes (301) 13 % (266) * 55

Income tax expense (6) 500 % (1) (50) % (2)

*Not meaningful

Total Revenues

The increase in Total revenues for 2023 as compared to 2022 was primarily driven by increased revenues from license and development services due to the progress in the research and development activities under our Taiho collaboration R&D services and our inflammation programs which commenced in 2023, partially offset by a decrease in revenue recognized for Taiho access rights which expired in 2022.

The decrease in Total revenues for 2022 as compared to 2021 was primarily driven by higher revenues in 2021 due to Gilead's exercise of its options, partially offset by increased revenues from R&D services in 2022.

See Note 5, Revenues to our Consolidated Financial Statements, in Part II, Item 8 for further discussion of the amount and timing of revenues recognized from our license and collaboration agreements.

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Research and Development Expenses

We group all of our R&D activities and the related expenditures into categories as described below:

Included as of December 31, 2023

Category Description Program Level Expenses Key ClinicalTrials

The following table summarizes our R&D expenses by category (in millions):

Early-stage development and preclinical programs 128 (12) % 145 46 % 99

Partnership reimbursements (162) 1 % (161) * (25)

*Not meaningful

The increase in R&D expenses for 2023 as compared to 2022 was primarily driven by higher costs to support our expanding late-stage development program activities, including standard-of-care therapeutic purchases, partially offset by lower clinical manufacturing costs due to the timing of activities. Our growing headcount drove an increase in compensation and personnel costs, including a $2 million increase in non-cash stock-based compensation. The overall increase was partially offset by reduced spend in our early-stage development and preclinical program activities due to fewer Phase 2 studies and higher clinical manufacturing costs in 2022 to support expanding study activities.

The increase in R&D expenses for 2022 as compared to 2021 was primarily driven by higher costs to support our expanding late-stage development program activities, including clinical trial costs, manufacturing costs and standard-of-care therapeutic purchases, and early-stage development and preclinical program activities. Our growing headcount drove an increase in compensation and personnel costs, including a $4 million increase in non-cash stock-based compensation. The overall increase was partially offset by higher reimbursements for shared expenses from our collaborators, primarily the Gilead collaboration which was expanded in December 2021.

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General and Administrative Expenses

The increase in G&A expenses for 2023 as compared to 2022 was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations. Our growing headcount and our 2023 stock awards drove a $9 million increase in employee compensation costs, including $6 million in increased non-cash stock-based compensation.

The increase in G&A expenses for 2022 as compared to 2021 was primarily driven by the increased complexity of supporting our expanding clinical pipeline and partnership obligations. Our growing headcount and our 2022 stock awards drove a $15 million increase in employee compensation costs, including $6 million in increased non-cash stock-based compensation. We also incurred a $13 million increase in office facilities expense due to the expansion of our office space to support our growing headcount.

Non-Operating Income, net

The increase in Non-operating income, net for 2023 as compared to 2022 was primarily due to higher interest income resulting from increased investment yields as compared to the prior year.

The increase in Non-operating income, net for 2022 as compared to 2021 was primarily due to a larger portfolio of marketable fixed-income securities and higher interest income resulting from increased investment yields as compared to the prior year.

Income Tax Expense

The increase in Income tax expense for 2023 as compared to 2022 was primarily due to an increase in taxable income compared to the prior year.

The decrease in Income tax expense for 2022 as compared to 2021 was due primarily to lower pretax income.

The 2023 and 2022 Income tax expense considers the impact of the capitalization of R&D expenses for income tax purposes due to changes in U.S. legislation. The capitalization of R&D expenses may materially impact income tax expense in future years.

Liquidity and Capital Resources

Our cash and investments are held in a variety of interest-bearing instruments, including money market funds, U.S. government treasury and agency obligations, investments in corporate securities and certificates of deposit. Based on our existing business plan, we believe that our cash, cash equivalents, and marketable securities as of December 31, 2023, together with the $320 million we received from Gilead for their equity investment on January 29, 2024, will be sufficient to fund our planned level of operations into 2027.

Sources of Liquidity

To date, we have financed our operations primarily from the sale of our equity securities and upfront or milestone payments from our research, collaboration and license agreements with our strategic partners including Gilead. We will need substantial additional funding to support our continuing operations and pursue our development strategy. Until such time that we can generate significant revenue from sales of our investigational products, if ever, we expect to finance our operations through the sale of equity, debt financings or other capital sources, including existing or potential collaborations with other companies or other strategic transactions. See “Item 1A. Risk Factors” for a discussion of the factors that could impact our liquidity.

Under the Stock Purchase Agreement, Gilead has the right, at its option, to purchase additional shares from us, up to a maximum ownership of 35% of our then-outstanding voting common stock, from time to time until July 2025. In June 2023, we amended and restated the Stock Purchase Agreement and sold 1.0 million shares of our common stock to Gilead at a purchase price of $19.26 per share for total gross proceeds of $20 million. In January 2024, we further amended and restated the Stock Purchase Agreement and sold 15.2 million shares of our common stock to Gilead at a purchase price of $21.00 per share for total gross proceeds of $320 million.

In 2023, we entered into an equity distribution agreement pursuant to which we may, from time to time, sell shares of our common stock having an aggregate offering price of up to $200 million. During the year ended December 31, 2023, we issued and sold under this agreement 0.2 million shares of our common stock for total net proceeds of $5 million.

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Material Cash Requirements

We expect to incur substantial expenditures in the foreseeable future as we expand our pipeline and advance our investigational products through clinical development, the regulatory approval process and, if approved, commercial launch activities. For example, in the near term we expect to incur substantial expenses relating to our ongoing and planned clinical trials, the development and validation of our manufacturing processes, and other preclinical, research and discovery development activities. These expenditures will be partially offset by reimbursements for shared expenses from our collaborations, primarily the Gilead collaboration, for certain expenses incurred on their optioned programs.

See “Contractual Obligations and Commitments” for more information regarding our cash requirements from known contractual commitments.

Cash Flows

The following table summarizes our cash flow activities for each of the periods presented below (in millions):

Year Ended December 31,

Operating Activities

Net cash used in operating activities for 2023 was $306 million as compared to net cash provided by operating activities of $438 million for the same period in the prior year. The change in operating cash flows is primarily due to $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement.

Net cash provided by operating activities for 2022 was $438 million as compared to net cash used in operating activities of $256 million for the prior year. The change in operating cash flows is primarily due to the $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement, partially offset by increased expenses incurred to support our expanded clinical development activities.

Investing Activities

Cash provided by investing activities for 2023 was primarily due to net proceeds from marketable securities of $218 million, partially offset by purchases of property and equipment of $24 million.

Cash used in investing activities for 2022 was primarily due to net purchases of marketable securities of $404 million as we invested a portion of the $725 million received from Gilead in January 2022 under the Gilead Collaboration Agreement.

Cash used in investing activities for 2021 was primarily due to purchases of property and equipment of $26 million, partially offset by net proceeds from marketable securities of $22 million.

Financing Activities

Cash provided by financing activities for 2023 was due to net proceeds of $25 million from issuance of our common stock, primarily due to stock purchases by Gilead, and proceeds of $8 million for stock issued under our equity award plans.

Cash provided by financing activities for 2022 was primarily due to net proceeds of $23 million for stock issued under our equity award plans and $10 million received under the BVF agreement.

Cash provided by financing activities for 2021 was primarily due to proceeds of $220 million from Gilead for stock issued under the Stock Purchase Agreement.

Contractual Obligations and Commitments

We have cash requirements to pay third parties under various contractual obligations as discussed below.

We are obligated to make payments for operating leases. See Note 13 to our Consolidated Financial Statements in Item 8 for further discussion.

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We are contractually obligated to pay additional amounts that in the aggregate are significant, upon the achievement of various development, regulatory and commercial milestones for agreements we have entered into with third parties. These payments are contingent upon the occurrence of various future events, substantially all of which have a high degree of uncertainty of occurring, and any resulting cash requirements are managed through our operational budgeting processes. See Note 4 to our Consolidated Financial Statements in Item 8 for further discussion.

We have a liability for sale of future royalties which consists of the current balance of estimated contingent milestone and royalty payments under the BVF agreement. See Note 15 to our Consolidated Financial Statements in Item 8 for further discussion.

We enter into contracts in the normal course of business with third parties for clinical trial management and execution, non-clinical studies and testing, manufacturing, and other services and products for operating purposes. These contracts are generally cancellable on 30 days’ notice, and therefore we believe that our non-cancelable obligations under these agreements are not material.

See Liquidity and Capital Resources — Material Cash Requirements above for further discussion of our cash requirements.

Critical Accounting Judgments and Estimates

Our Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, as well as the reported revenue and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s significant judgments and estimates.

While our significant accounting policies are described in the notes to our Consolidated Financial Statements, we believe that the following critical accounting estimates are most important to understanding and evaluating our reported financial results.

Revenue Recognition

At the inception of an arrangement, we evaluate if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance, and the term of the contract. We recognize revenue when a customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. In addition, variable consideration such as milestone payments are evaluated to determine if they are constrained and, therefore, excluded from the transaction price. We then allocate the total transaction price to each performance obligation based on their relative estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

For the recognition of revenue relating to the Gilead Agreements, as disclosed in Note 5, Revenues, to our Consolidated Financial Statements in Part II, Item 8, we allocated the total transaction price to each performance obligation on a relative standalone selling price basis and determined whether revenue should be recognized at a point in time or over time as services are performed. The estimation of the standalone selling price included estimates for forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time as services are performed, and we measure the services delivered to Gilead, which we periodically review based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration (e.g., milestone payments) is evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

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Revenue related to certain performance obligations that are satisfied over time could be materially impacted as a result of changes in the total estimated effort required to satisfy those obligations. A hypothetical 10% change in the total estimated effort required to satisfy the combined license and R&D activities performance obligations related to the agreement with Gilead would have changed the related revenue recognized during the current year by as much as $8 million. For the year ended December 31, 2023, we recognized $4 million in cumulative catch-up revenues from such changes in estimates. See Results of Operations above for further discussion. These changes in estimate could have a material impact on the revenue recognized in a future period.

For performance obligations that are distinct and determined to be transferred or satisfied at a point in time, the estimated standalone selling price will affect the amount of revenue recognized upon satisfaction of the related performance obligation such as the transfer of control of a license. For the domvanalimab license with Gilead, transfer of the license and satisfaction of the related performance obligation occurred in 2021. The estimated standalone selling price of the domvanalimab license utilized assumptions of discounted cash flows which require judgment. A 10% change in the total estimated cash flows used in determining the estimated standalone selling price of the domvanalimab license would have resulted in a change in the amount of revenue recognized in 2021 of approximately $20 million with a corresponding change in the transaction price allocated to the remaining performance obligations in the Gilead Collaboration Agreement.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 2 to our Consolidated Financial Statements in Item 8 for a discussion of recently adopted accounting pronouncements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks that may result from changes in interest rates and foreign currency exchange rates.

Interest Rate Risk

As of December 31, 2023 and 2022, we had cash, cash equivalents and marketable securities of $866 million, and $1.1 billion, respectively. This consisted of interest-bearing money market accounts and investments in corporate notes and U.S. government securities, which create an exposure to interest rate risk. A hypothetical 100 basis point increase in interest rates as of December 31, 2023 and 2022 would not have resulted in a material effect on the fair market value of our cash, cash equivalents and marketable securities. In addition, a hypothetical 100 basis point decrease in interest rates as of December 31, 2023 and 2022 would not result in a material effect on income in the respective ensuing year.

Foreign Currency Exchange Risk

We do not have any foreign currency forward or cross currency swap contracts. We are exposed to foreign currency exchange rate risk inherent in our contracts with research institutions, CROs, and contract manufacturing organizations as certain services are performed by them outside the United States and billed in other currencies. A hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates as of December 31, 2023 and 2022, respectively would not result in material impact to our financial position or income in the respective ensuing year.

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Item 8. Financial Statements and Supplementary Data

ARCUS BIOSCIENCES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 42) 67

Audited Consolidated Financial Statements

Consolidated Statements of Operations 69

Consolidated Statements of Comprehensive Income (Loss) 70

Consolidated Balance Sheets 71

Consolidated Statements of Stockholders’ Equity 72

Consolidated Statements of Cash Flows 73

Notes to Consolidated Financial Statements 74

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Arcus Biosciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Arcus Biosciences, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 21, 2024 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Accounting for agreements with Gilead Sciences, Inc.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2016.

San Mateo, California

February 21, 2024

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ARCUS BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

Year Ended December 31,

Revenues:

Operating expenses:

Income (loss) from operations (340) (280) 54

Non-operating income (expense):

Interest and other income, net 41 16 1

Effective interest on liability for sale of future royalties (2) (2) —

Total non-operating income, net 39 14 1

Income (loss) before income taxes (301) (266) 55

Income tax expense (6) (1) (2)

Net income (loss) per share:

Shares used to compute net income (loss) per share:

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

Year Ended December 31,

Other comprehensive income (loss) 7 (6) (1)

Comprehensive income (loss) $ (300) $ (273) $ 52

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2023 and 2022

(In millions, except per share amounts)

December 31,

ASSETS

Current assets:

Cash and cash equivalents $ 127 $ 206

Receivable from collaboration partners ($20 and $39 from a related party) 38 39

Prepaid expenses and other current assets 34 19

Long-term marketable securities 107 129

Property and equipment, net 51 35

Other noncurrent assets ($6 and $2 from a related party) 106 114

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable $ 17 $ 20

Deferred revenue ($84 and $97 to a related party) 91 97

Other current liabilities 76 76

Total current liabilities 184 193

Deferred revenue, noncurrent ($291 and $355 to a related party) 307 355

Other noncurrent liabilities 142 140

Commitments (Note 16)

Stockholders’ equity:

Accumulated deficit (849) (542)

Accumulated other comprehensive loss — (7)

Total stockholders’ equity 462 657

Total liabilities and stockholders’ equity $ 1,095 $ 1,345

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2023, 2022 and 2021

(In millions)

Stock-based compensation — 55 — — 55

Other comprehensive loss — — — (1) (1)

Net income — — 53 — 53

Stock-based compensation — 65 — — 65

Other comprehensive loss — — — (6) (6)

Stock-based compensation — 73 — — 73

Other comprehensive gain — — — 7 7

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

Year Ended December 31,

Cash flow from operating activities

Stock-based compensation expense 73 65 55

Depreciation and amortization 8 6 4

Noncash lease expense 8 8 3

Amortization of premiums (discounts) on marketable securities (19) — 5

Other items, net 2 3 —

Changes in operating assets and liabilities:

Other assets (($4), ($2) and $— from a related party) (14) 2 (3)

Accounts payable (1) 8 (5)

Other liabilities (3) 21 17

Net cash provided by (used in) operating activities (306) 438 (256)

Cash flow from investing activities

Purchases of marketable securities (788) (1,241) (719)

Proceeds from maturities of marketable securities 982 694 690

Proceeds from sales of marketable securities 24 143 51

Purchases of property and equipment (24) (6) (26)

Purchases of in-process research and development — (6) —

Net cash provided by (used in) investing activities 194 (413) (4)

Cash flow from financing activities

Proceeds from issuance of common stock pursuant to equity award plans 8 23 12

Proceeds from sale of future royalties — 10 5

Net cash provided by financing activities 33 33 237

Cash, cash equivalents and restricted cash at beginning of period 209 151 174

Cash, cash equivalents and restricted cash at end of period $ 130 $ 209 $ 151

Supplemental disclosure of cash flow information

Income taxes paid $ 5 $ 3 $ —

Non-cash investing and financing activities:

Vesting of early exercised stock options and restricted stock $ — $ — $ 1

See accompanying notes.

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ARCUS BIOSCIENCES, INC.

Notes to Consolidated Financial Statements

Note 1. Organization, liquidity and capital resources

Organization

Arcus Biosciences, Inc. (referred to as “Arcus,” “we,” “our,” “us,” or the “Company”) is a clinical-stage biopharmaceutical company focused on creating best-in-class therapies. Using our robust and highly efficient drug discovery capability, we have created a significant portfolio of investigational products which are in clinical development, with our most advanced molecule, an anti-TIGIT antibody, now in multiple Phase 3 registrational studies targeting lung and gastrointestinal cancers. Our deep portfolio of novel small molecules and enabling antibodies allows us to create highly differentiated therapies, which we are developing to treat multiple large indications.

We operate and manage our business as one reportable and operating segment, which is the business of developing and commercializing highly differentiated therapies that have a meaningful impact on patients.

Liquidity and Capital Resources

As of December 31, 2023, we had cash, cash equivalents and marketable securities of $866 million. In January 2024, we received $320 million from Gilead for shares purchased pursuant to the Third Stock Purchase Agreement Amendment (see Note 3. Related party - Gilead Sciences, Inc.). We believe our cash, cash equivalents and marketable securities will be sufficient to fund our planned operations for a period of at least twelve months following the date of filing of this Annual Report.

Note 2. Summary of significant accounting policies

Basis of Presentation

The Consolidated Financial Statements, which include the accounts of Arcus as well as its wholly owned subsidiary, have been prepared in accordance with U.S. GAAP and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. All intercompany transactions and balances have been eliminated in consolidation.

We assess whether we are the primary beneficiary of a Variable Interest Entity ("VIE") at the inception of the arrangement and at each reporting date. This assessment is based on our power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and our obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not have any significant interests in any variable interest entities of which we are the primary beneficiary.

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. We base our estimates on historical experience and on various market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates are assessed and updated each period to reflect current information. Actual results may differ materially from those estimates.

Collaborative Arrangements

We assess whether our licensing and other agreements are collaborative arrangements based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. For arrangements that we determine are collaborations, we identify each distinct performance obligation, and then determine whether a customer relationship exists for that distinct performance obligation. If we determine a performance obligation within the collaborative arrangement to be with a customer, we apply our revenue accounting policy. If a portion of a distinct bundle of goods or services within the collaborative arrangement is not with a customer, we apply recognition and measurement based on an analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election. See Note 4, License and collaborations, for more information.

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Revenues

We recognize revenue when a customer obtains control of promised goods or services in a contract for an amount that reflects the consideration we expect to receive in exchange for those goods or services. For contracts with customers, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. As part of the accounting for contracts with customers, we develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract. In addition, variable consideration such as milestone payments are evaluated to determine if they are constrained and, therefore, excluded from the transaction price. We then allocate the total transaction price proportionally to each performance obligation based on their estimated standalone selling prices. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

We currently do not have product sales and our revenues are derived from arrangements for the development of our investigational products. Such arrangements may require us to deliver various rights, services and/or goods, including intellectual property rights/licenses, R&D services, manufacturing services and/or commercialization services. The underlying terms of these arrangements may generally include consideration to Arcus in the form of one or more of the following: (i) nonrefundable, up-front license fees; (ii) milestone payments related to the achievement of developmental, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) fees attributable to options to intellectual property; and (v) profit sharing.

In arrangements involving more than one performance obligation, each performance obligation is evaluated to determine whether it qualifies as distinct based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or by using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods is transferred or services are performed. We evaluate each performance obligation to determine if it can be satisfied at a point in time or over time as services are performed. For performance obligations that are determined to be satisfied over time we determine an appropriate method of measuring progress for purposes of recognizing revenue.

Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur.

For arrangements that include sales-based royalties, including milestone payments based on sales thresholds, and for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, we have not recognized any royalty revenue resulting from any of our arrangements.

The accounting for these arrangements requires us to develop estimates and assumptions that require judgment. These estimates may include items such as forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. Actual results may differ materially from those estimates.

See Note 5, Revenues, for more information.

Research and Development Expenses

R&D costs are expensed as incurred and primarily include: salaries, benefits and other staff-related costs; facilities and overhead costs; third-party service provider costs for preclinical and clinical studies; laboratory supplies and equipment maintenance costs; consulting; payments under collaborative and other arrangements including milestone payments, licenses and fees; expense reimbursements to collaboration partners; and other related expenses. Under certain collaborative arrangements, we are reimbursed for a portion of the R&D expenses, including costs of drug supplies. When these R&D expenses are incurred under a reimbursement or cost sharing model with a collaboration partner, we record the related reimbursements as a reduction of R&D expense in our Consolidated Statements of Operations. Acquired in-process R&D projects with no alternative future use are recorded in R&D expense upon acquisition.

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Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the cost recovery. See Note 4, License and collaboration agreements, for more information.

Clinical trial costs are a significant component of R&D expenses. Our clinical studies are primarily performed by third-party CROs. We monitor levels of performance under each significant contract including the extent of patient enrollment and other activities and accrue costs for clinical studies performed over the service periods specified in the contract. We adjust our estimates, if required, based upon our ongoing review of the level of effort and costs actually incurred by the CROs. All of our material CRO contracts are terminable by us upon written notice, and we are generally only liable for actual services completed by the CRO and certain noncancellable expenses incurred at termination.

General and Administrative Expenses

G&A expenses relate to: finance; human resources; legal and other administrative activities which consist primarily of personnel costs; facilities and overhead costs; legal expenses; and other general and administrative costs. G&A expenses also include cost recoveries associated with collaborative R&D arrangements.

Stock-Based Compensation

We provide stock-based compensation in the form of various types of equity-based awards, including Restricted Stock Units ("RSUs") and stock options. The fair values of RSUs and stock options, which are subject to service conditions and vesting, are recognized as compensation expense on a straight-line basis over the service period net of forfeitures as they occur. See Note 8, Stock-based compensation, for more information.

Income Taxes

We provide for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards, measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when we determine it is more likely than not that some or all of the tax benefits will not be realized.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate.

We include any penalties and interest expense related to income taxes as a component of other expense and interest income, net, as necessary.

See Note 6, Income taxes, for more information.

Cash Equivalents

Cash equivalents consist of marketable securities having an original maturity of three months or less at the time of purchase.

Marketable Securities

We consider our interest-bearing securities investment portfolio as available-for-sale, and accordingly, these investments are recorded at fair value, with unrealized gains and losses recorded in Accumulated Other Comprehensive Income. See Note 10, Cash, cash equivalents and marketable securities, and Note 15, Fair value measurements, for more information.

Property and Equipment

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to ten years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease term. We review property and equipment for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. See Note 11, Property and equipment, for more information.

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Leases

We determine whether an arrangement is or contains a lease at contract inception. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term, which is the non-cancelable period stated in the contract adjusted for any options to extend or terminate when it is reasonably certain that we will exercise that option. Right-of-use assets are adjusted for prepaid lease payments, lease incentives and initial direct costs incurred. Operating lease expense for the minimum lease payments is recognized on a straight-line basis over the lease term. When our operating leases do not provide an implicit interest rate, we generally utilize our incremental borrowing rate, based on the information available at the commencement date to determine the lease liability. We do not recognize the right-of-use assets and liabilities for leases with lease terms of one year or less with payments recognized as operating expenses on a straight-line basis over the lease term.

We sublease parts of our facilities to third parties and recognize sublease income on a straight-line basis over the sublease term. We evaluate the underlying assets for impairment at sublease inception.

See Note 13, Leases, for more information.

Fair Value of Financial Instruments

We apply fair value accounting for all financial and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risks. See Note 15, Fair value measurements, for more information.

Other Significant Accounting Policies

Our other significant accounting policies are described in the remaining appropriate notes to the Consolidated Financial Statements.

Recent Accounting Pronouncements

There have been no new accounting pronouncements issued or adopted during the year ended December 31, 2023 with a significant impact to our financial statements.

Note 3. Related party - Gilead Sciences, Inc.

In 2020, we and Gilead entered into an Option, License and Collaboration Agreement (the "Gilead Collaboration Agreement"), Common Stock Purchase Agreement (the "Stock Purchase Agreement"), and Investor Rights Agreement (the "Investor Rights Agreement"). In 2021, we amended the Gilead Collaboration Agreement (the "First Gilead Collaboration Agreement Amendment") and the Stock Purchase Agreement (the "First Stock Purchase Agreement Amendment"). In 2022, we amended the Investor Rights Agreement (the "First Investor Rights Agreement Amendment"). In 2023, we further expanded our collaboration (the "Second Gilead Collaboration Agreement Amendment") and further amended the Stock Purchase Agreement (the "Second Stock Purchase Agreement Amendment"). On January 29, 2024, we further amended the Gilead Collaboration Agreement (the "Third Gilead Collaboration Agreement Amendment"), amended and restated our stock purchase agreements (the "Third Stock Purchase Agreement Amendment") and amended and restated our investor rights agreement (the "Second Investor Rights Agreement Amendment"). We refer to these agreements collectively as the Gilead Agreements.

Stock Purchase Agreement and Investor Rights Agreement

In 2020, under the Stock Purchase Agreement, Gilead purchased 6.0 million shares of our common stock for total gross proceeds of $200 million, of which $91 million was allocated to the revenue related performance obligations created by the Gilead Collaboration Agreement (See Note 5, Revenues for more information).

In 2021, under the First Stock Purchase Agreement Amendment, Gilead purchased 5.7 million shares of our common stock for total gross proceeds of $220 million.

In 2023, under the Second Stock Purchase Agreement Amendment, Gilead purchased 1.0 million shares of our common stock for total gross proceeds of $20 million.

On January 29, 2024, under the Third Stock Purchase Agreement Amendment, Gilead purchased 15.2 million shares of our common stock for total gross proceeds of $320 million.

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Gilead has the right, at its option until July 2025, to purchase up to a maximum of 35% of the Company’s then-outstanding voting common stock, at a purchase price equal to the greater of a 20% premium to market (based on a trailing five-day average closing price at option exercise) or the $33.54 initial purchase price. Based on the value of our common stock at each contract closing, the right to purchase additional shares had no value.

Under the Investor Rights Agreement entered into in 2020, Gilead has the right, which they have exercised, to designate two members of our board of directors. This agreement also included a three-year standstill and a two-year lockup, provided Gilead with registration rights commencing at the end of the lockup period and provides Gilead with pro rata participation rights in certain future financings. In October 2022, we registered shares purchased by Gilead under the Stock Purchase Agreement and the First Stock Purchase Agreement Amendment and entered into the First Investor Rights Agreement Amendment, primarily to extend the two-year lockup period to three-years which expired on July 13, 2023. On January 29, 2024, under the Second Investor Rights Agreement Amendment, and in connection with the Third Stock Purchase Agreement Amendment, Gilead received the right, which they have exercised, to designate a third individual to be appointed to our board.

As of December 31, 2023, Gilead held approximately 19.6% of our outstanding common stock arising from purchases in our May 2020 public offering and purchases under the Stock Purchase Agreement and the First and Second Stock Purchase Agreement Amendments. As of January 31, 2024, after including shares purchased by Gilead under the Third Stock Purchase Agreement Amendment, Gilead held approximately 33.1% of our outstanding common stock.

Collaboration Agreements

In 2020, we entered into the Gilead Collaboration Agreement, which gave Gilead an exclusive license to develop and commercialize zimberelimab (the anti PD-1 program) in certain markets and time-limited options to acquire exclusive licenses to develop and commercialize any of our then-current and future clinical programs arising during the 10-year collaboration term, contingent upon $100 million option continuation payments payable on each of the second, fourth, sixth and eighth anniversaries of the agreement. Upon closing of the transaction in July 2020, Gilead made an upfront payment of $175 million.

In 2021, we entered into the First Gilead Collaboration Agreement Amendment pursuant to which Gilead exercised its option to three programs—providing Gilead with exclusive licenses to develop and commercialize domvanalimab and AB308 (collectively, the anti-TIGIT program), etrumadenant (the adenosine receptor antagonist program) and quemliclustat (the CD73 program), in certain markets—for a total payment of $725 million that was received in 2022. The amendment also (i) provided for a slight reduction in the royalties for these three programs, such that Gilead will pay us tiered royalties as a percentage of revenues ranging from the mid-teens to the low twenties; and (ii) removed the $100 million option continuation payment that was otherwise due on the second anniversary of the Gilead Collaboration Agreement.

Gilead's option, on a program-by-program basis, will expire after a prescribed period following the achievement of a clinical development milestone in such program and our delivery to Gilead of the requisite data package. Gilead may exercise its option to any program at any time prior to expiration of the option and will pay Arcus an option fee of $150 million per program. With respect to domvanalimab, we are also eligible to receive up to $500 million in potential U.S. regulatory approval milestones.

For each program that Gilead opts in to, both companies will co-develop and equally share global development costs, subject to certain opt-out rights that we have, caps on our spending and related subsequent adjustments, and certain other exceptions. For each program, provided we have not exercised our opt-out rights, we have the option to co-promote in the United States with equal sharing of related profits and losses. Gilead has the right to exclusively commercialize outside of the U.S., subject to the rights of our existing partners in any territories and will pay us tiered royalties as a percentage of revenues ranging from the high teens to the low twenties.

Under the First Gilead Collaboration Agreement Amendment, Gilead also has option rights to two oncology research programs for which we will lead discovery and early development activities. With respect to these two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $60 million or (ii) following the achievement of a clinical development milestone for an option payment of $150 million. These research programs were not determined to be performance obligations at contract inception, due to the very early stages of the programs.

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In May 2023, we entered into the Second Gilead Collaboration Agreement Amendment pursuant to which we expanded our collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities. We will receive an upfront payment of $17.5 million for each initiated program and Gilead will have an option to license each program at two separate, prespecified time points. For the first two research programs, Gilead has the right to exercise its option, on a program-by-program basis, either (i) upon our completion of certain IND-enabling activities for an option payment of $45 million or (ii) following the achievement of a clinical development milestone for an option payment of $150 million. If Gilead exercises its option at the earlier time point for the first two programs, we would be eligible to receive up to $375 million in regulatory and commercial milestone payments as well as tiered royalties for each optioned program. For any other program option exercise by Gilead, the parties would have rights to co-develop and share global development costs and to co-commercialize and share profits in the U.S. for that program. We received a total upfront payment of $35 million for an initial two research programs in June 2023. For the other two research programs, Gilead’s options expire unless the programs are selected prior to the first anniversary of the Second Gilead Collaboration Agreement Amendment.

On January 29, 2024, we entered into the Third Gilead Collaboration Agreement Amendment. The Third Gilead Collaboration Agreement Amendment, among other things, (i) requires Gilead to pay the $100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement, (ii) provides that we will operationalize and fund a Phase 3 study we plan to initiate to evaluate quemliclustat in pancreatic cancer, (iii) provides that we will solely fund our share of PACIFIC-8, subject to Gilead’s right to reinstate PACIFIC-8 as part of the parties’ joint development activities for the TIGIT Program in the first quarter of 2026, and (iv) provides that we will fund certain other activities. All other terms of the existing collaboration agreements, remain unchanged. We are evaluating the impact of this amendment under the accounting rules for contract modifications as a change in scope or price of the original contract. Once we determine that a contract has been modified, the modification may be required to be treated as separate, standalone contract, or combined with the original contract. In addition, some modifications are accounted for on a prospective basis and others on a cumulative catch-up basis.

As of December 31, 2023, Gilead has licenses to domvanalimab, AB308, etrumadenant, quemliclustat and zimberelimab.

For the years ended December 31, 2023, 2022 and 2021; we recognized revenue under the Gilead Agreements of $112 million, $107 million and $361 million, respectively and net reimbursements from Gilead recognized as reductions in R&D expense of $110 million, $132 million and $25 million, respectively. For the year ended December 31, 2022, we recognized reimbursements from Gilead as reductions in G&A expense of $1 million.

For a more detailed discussion on revenues recognized under the Gilead Agreements, see Note 5, Revenues.

Note 4. License and collaborations

We enter into licensing agreements, strategic collaborations and other similar arrangements with third parties for the development and commercialization of certain investigational products. These arrangements may be collaborative and involve two or more parties who are active participants in the operating activities of the collaboration and are exposed to significant risks and rewards depending on the commercial success of the activities. These arrangements may include: non-refundable upfront payments; payments for options to acquire certain rights; potential development and regulatory milestone payments and/or sales-based milestone payments; royalty payments; revenue or profit-sharing arrangements; expense reimbursements; and cost-sharing arrangements. See Note 2, Summary of significant accounting policies, for additional discussion of revenues recognized under these types of arrangements.

Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line items in the Consolidated Statements of Operations, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Our significant arrangements are discussed below.

Gilead Collaboration

See Note 3, Related party - Gilead Sciences, Inc.

Taiho Collaboration

In 2017, we entered into an agreement with Taiho under which we granted them exclusive options to programs arising over a five-year period which ended in September 2022 for an upfront payment of $35 million. Upon an option exercise of a program, Taiho would obtain exclusive development and commercialization rights to investigational products under the program for the Taiho Territory.

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For each option that Taiho exercises, they will be obligated to make a payment of $3 million to $15 million, depending on the development stage of the optioned program. Upon exercise, Taiho is solely responsible for continued development and commercialization in the Taiho Territory. In addition, for each optioned program we would be eligible to receive clinical and regulatory milestones of up to $130 million and commercial milestone payments of up to $145 million with the achievement of certain sales thresholds in the Taiho Territory. We will also receive royalties ranging from high single-digits to mid-teens on net sales of licensed products in the Taiho Territory. Royalties will be payable by product and country commencing on the first commercial sale and ending upon the later of: (a) 10 years; and (b) expiration of the last-to-expire valid claim of our patents covering the manufacture, use or sale.

As of December 31, 2023, Taiho has licenses for the Taiho Territory to (i) etrumadenant (the adenosine receptor antagonist program); (ii) zimberelimab (the anti PD-1 program); and (iii) domvanalimab and AB308 (collectively, the anti-TIGIT program).

During 2022, Taiho opted to participate in two global Phase 3 trials of domvanalimab and zimberelimab combinations, STAR-121 and STAR-221, and became obligated to make certain milestone payments contingent upon successfully satisfying the related clinical milestones. During the year ended December 31, 2023, the clinical milestones for domvanalimab and zimberelimab for the STAR-221 study were met and Taiho became obligated to pay us $28 million and in early 2024 the clinical milestones for domvanalimab and zimberelimab for the STAR-121 study were met and Taiho became obligated to pay us $26 million.

For each of the years ended December 31, 2023, 2022 and 2021, we recognized revenue of $5 million, $5 million and $22 million, respectively, under this agreement. For a more detailed discussion on revenues see Note 5, Revenues.

For the year ended December 31, 2023, we recognized net reimbursements from Taiho as a reduction in R&D expense of $8 million.

AstraZeneca Collaboration

In 2020, we entered into a collaboration with AstraZeneca to evaluate domvanalimab, our investigational anti-TIGIT antibody, in combination with AstraZeneca’s durvalumab in a registrational Phase 3 clinical trial in patients with unresectable Stage 3 NSCLC, known as the PACIFIC-8 trial. The terms of the agreement were amended in January 2024. Under the collaboration, as amended, each company will retain existing rights to their respective molecules and any future commercial economics. AstraZeneca will conduct the trial, and each company will supply their respective investigational product to support the trial. We may incur milestones of up to $24 million upon the achievement of certain clinical trial progress milestones or under certain circumstances if the agreement is terminated early and we will reimburse AstraZeneca annually for a portion of the trial costs. The portion of the costs that we consider to be unavoidable are accrued as incurred and milestones that are deemed probable of occurring are accrued in advance of the achievement of the milestone.

For the years ended December 31, 2023, 2022 and 2021 under this arrangement we recognized as R&D expense $6 million, $4 million, and $1 million respectively, before expected recoveries from our cost-sharing agreement with Gilead. At December 31, 2023 and 2022, we have recognized liabilities of $11 million and $5 million, respectively, related to our obligation to AstraZeneca which is recorded in Other noncurrent liabilities.

As of December 31, 2023, the PACIFIC-8 trial formed part of the Arcus and Gilead joint development program for domvanalimab and our portion of the trial costs were shared with Gilead. At December 31, 2023 and 2022, we have recognized receivables due from Gilead for these shared costs of $6 million and $2 million, respectively, which is recorded in Other noncurrent assets. On January 29, 2024, under the Third Gilead Collaboration Agreement Amendment, we agreed to solely fund our share of PACIFIC-8, subject to Gilead’s right to reinstate PACIFIC-8 as part of the parties’ joint development activities for the TIGIT Program in the first quarter of 2026. On the date of this amendment, we will incur $6 million of R&D costs reflecting our additional share of incurred costs to date.

WuXi Biologics License – anti-PD-1

In 2017, we entered into an agreement with WuXi Biologics which, as amended, provides us with exclusive rights to (i) develop, use and manufacture products that include an anti-PD-1 antibody, including zimberelimab, worldwide and (ii) commercialize any such products worldwide, except in Greater China. Under the agreement, as of December 31, 2023 we may incur (i) regulatory milestone payments of up to $50 million for zimberelimab, and commercialization milestone payments of up to $375 million, (ii) tiered royalties that range from the high single-digits to low teens on net sales of the licensed products and (iii) fees related to any sublicenses.

During the year ended December 31, 2021, we incurred milestones of $10 million related to this agreement which were recorded as R&D expense.

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WuXi Biologics License – anti-CD39

In 2020, we entered into an agreement with WuXi Biologics, under which we obtained the exclusive worldwide license to develop and commercialize anti-CD39 antibodies discovered under the agreement. As of December 31, 2023 we may incur additional clinical and regulatory milestone payments of up to $14 million and royalty payments in the low single digits on net sales of the licensed products under this agreement.

During the years ended December 31, 2023 and 2022, we incurred development milestones of $1 million and $2 million, respectively, related to this agreement, which were recognized as R&D expense.

Abmuno License

In 2016, we entered into an agreement with Abmuno, under which we obtained the exclusive worldwide license to develop, use, manufacture, and commercialize products that include an anti-TIGIT antibody, including domvanalimab. Under the agreement, as of December 31, 2023 we may incur additional clinical, regulatory and commercialization milestone payments of up to $88 million.

During the years ended 2022 and 2021, we incurred development milestone expenses of $5 million and $5 million, respectively, related to this agreement, which were recorded as R&D expense.

Exelixis Collaboration

In 2023, we entered into a clinical trial collaboration with Exelixis for STELLAR-009, a Phase 1b/2 trial to evaluate casdatifan, our investigational inhibitor of the transcription factor HIF-2⍺, in combination with Exelixis’s zanzalintinib, a next-generation tyrosine kinase inhibitor, in patients with ccRCC. Under the collaboration, each company will retain existing rights to their respective molecules and any future commercial economics. Exelixis will conduct the STELLAR-009 trial, and each company will supply their respective investigational product to support the trial. We will reimburse Exelixis for a portion of the trial costs. Patient enrollment for STELLAR-009 opened at the end of 2023.

For the year ended December 31, 2023, we recognized R&D expense of $3 million under this arrangement.

Note 5. Revenues

The following table summarizes our revenues by collaboration, category of revenue, and the method of recognition (in millions):

Year Ended December 31,

Gilead Collaboration

License to domvanalimab * $ — $ — $ 329

License and R&D services * 79 74 1

Taiho Collaboration

License to domvanalimab * — — 15

R&D services * 5 — —

Access rights * — 5 7

Revenues from Gilead accounted for 96% of Total revenues for both years ended December 31, 2023 and 2022, and 94% of Total revenues for the year ended December 31, 2021.

The following table summarizes the revenue recognized as a result of changes in the deferred revenue balance (in millions):

Year Ended December 31,

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We had $398 million and $452 million of deferred revenue remaining on our Consolidated Balance Sheets at December 31, 2023 and December 31, 2022, respectively, allocated between current and noncurrent based on the expected timing of future recognition.

Revenue from the Gilead Collaboration

In 2021, we determined that the First Gilead Collaboration Agreement Amendment represented a contract modification and at the amendment closing date of December 21, 2021, we allocated the transaction price to the new and remaining performance obligations (see Note 3, Related party - Gilead Sciences, Inc., for more information). The following table summarizes the transaction price and the allocation of the transaction price to the performance obligations (in millions):

Transaction price Amount

Deferred revenues as of December 21, 2021 $ 165

Option payment for Domvanalimab 275

Option payment for Etrumadenant 250

Option payment for Quemliclustat 200

Total transaction price $ 890

Allocation to performance obligations Distinct Combined Amount

Domvanalimab - License * $ 329

Domvanalimab - R&D services * 34

Etrumadenant - License and R&D services * 219

Quemliclustat - License and R&D services * 176

Zimberelimab - R&D and commercial services * 11

Access rights * 84

Option continuation periods * 37

Total allocated transaction price $ 890

Our assessment of the transaction price for the First Gilead Collaboration Agreement Amendment included an analysis of amounts we expected to receive, which at contract inception consisted of the upfront cash payment of $725 million, as well as amounts totaling $165 million deferred from the original Gilead transaction. This excludes the $100 million option continuation payment that was eliminated in the amendment. We determined the entire $890 million to be the allocable transaction price as of the amendment closing date, due to the history of timely payments by Gilead including the receipt of $725 million in January 2022.

We accounted for each performance obligation as follows:

Domvanalimab – License

Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our anti-TIGIT program, including domvanalimab and AB308, in exchange for an option payment of $275 million, if exercised. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $37 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation.

Effective December 2021, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to domvanalimab. We determined that this license was distinct based on an evaluation of the delivery of the license, noting that the program was in the later stages of development and it met the criteria for being distinct from the R&D services required under the First Gilead Collaboration Agreement Amendment. Specifically, the domvanalimab program was in a Phase 3 clinical trial at the time that Gilead acquired the license and the Company concluded that: (i) the R&D services for such later-stage, Phase 3 IP, primarily involved validating the drug’s efficacy, and (ii) the ongoing R&D services do not significantly modify or customize the drug compound such that the IP is not significantly different at the end of the arrangement as a result of the services. We determined the standalone selling price of this license using a discounted cash flow method.

We recognized as revenue the full $329 million of the allocated transaction price in the year ended December 31, 2021.

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Domvanalimab – R&D Services

Under the First Gilead Collaboration Agreement Amendment, we determined that we retain a separate performance obligation to perform further R&D services for Gilead related to domvanalimab. The standalone selling price of this obligation was determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized $5 million in both years ended December 31, 2023 and 2022 within License and development services revenue in our Consolidated Statements of Operations. No revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2023 we had $25 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation.

Etrumadenant – License and R&D Services

Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to our adenosine receptor program, etrumadenant, in exchange for an option payment of $250 million, if exercised. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $127 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation.

Effective December 2021, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to etrumadenant and we were also obligated to perform further R&D services for Gilead related to etrumadenant. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized $52 million and $34 million in the years ended December 31, 2023 and 2022, respectively, within License and development service revenue in our Consolidated Statements of Operations. No revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2023 we had $133 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation.

Quemliclustat – License and R&D Services

Under the Gilead Collaboration Agreement, Gilead obtained an option to the exclusive rights to the Company's CD73 program, quemliclustat, in exchange for an option payment of $200 million, if exercised. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had no deferred revenue on our Consolidated Balance Sheet related to this performance obligation.

Effective December 2022, under the First Gilead Collaboration Agreement Amendment, Gilead exercised the option and obtained an exclusive license to quemliclustat and we were also obligated to perform further R&D services for Gilead related to quemliclustat. We determined that the license and R&D services were combined based on an evaluation of the delivery of the license, due to the early stage of the technology and the specialized nature of our know-how. We determined the standalone selling price of the license using a discounted cash flow method and the R&D services using an expected cost-plus margin approach. We recognize the amounts allocated to the combined license and services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

We recognized $17 million and $26 million in the years ended December 31, 2023 and 2022, respectively, within License and development service revenue in our Consolidated Statements of Operations. No revenue was recognized in 2021 as the R&D services had not yet commenced. At December 31, 2023 we had $132 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation.

Zimberelimab – R&D and Commercialization Services

Under the First Gilead Collaboration Agreement Amendment, we determined that we retained separate performance obligations to perform further R&D and commercialization services for Gilead related to zimberelimab, as a monotherapy and in combination with other agents. Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $10 million of deferred revenue on our Consolidated Balance Sheet, related to these performance obligations. The standalone selling price of these obligations were determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligations are satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program.

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We recognized $1 million, $9 million, and $1 million for R&D and commercialization services in the years ended December 31, 2023, 2022, and 2021, respectively, within License and development service revenue in our Consolidated Statements of Operations. At December 31, 2023, the performance obligation was fully satisfied and all revenue has been recognized.

Access Rights and Option Continuation Periods

Under the First Gilead Collaboration Agreement Amendment, Gilead has exclusive access to our current programs as well as the future programs for a period of ten years, contingent upon option continuation payments totaling $300 million, consisting of a $100 million payment on each of the fourth, sixth, and eighth anniversaries of the Gilead Collaboration Agreement.

Prior to the closing of the First Gilead Collaboration Agreement Amendment, we had $92 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation from the Gilead Collaboration Agreement.

The standalone selling price of this ongoing R&D pipeline access was determined using an expected cost-plus margin approach. We use a time-elapsed input method to measure progress toward satisfying this obligation, which is the method we believe most faithfully depicts the Company’s performance in transferring the promised services during the time period in which Gilead has access to our R&D pipeline. Accordingly, the revenue allocated to this performance obligation is being recognized using this input method over the minimum four-year period. We determined that as of the closing date of December 21, 2021, Gilead is not obligated to pay the remaining $300 million due over the remainder of the term and excluded these payments from the transaction price. Failure to pay the non-obligatory option continuation payments will result in Gilead’s loss of certain rights to access and obtain licenses to the programs arising from our R&D pipeline.

See Note 3. Related party - Gilead Sciences, Inc., for a description of the amendment that occurred on January 29, 2024, which requires Gilead to pay the $100 million option continuation payment due on the fourth anniversary of the Gilead Collaboration Agreement.

We recognized as revenue $33 million associated with this performance obligation in both years ended December 31, 2023 and 2022, and $31 million in the year ended December 31, 2021 within Other collaboration revenue in our Consolidated Statements of Operations. At December 31, 2023, we had $54 million of deferred revenue on our Consolidated Balance Sheet related to this performance obligation.

Inflammation Programs - R&D Services

In May 2023, we entered into the Second Gilead Collaboration Agreement Amendment pursuant to which we expanded our collaboration to provide Gilead with options to license up to four jointly selected research-stage programs that target inflammatory diseases for which we will lead discovery and early development activities (see Note 3, Related party - Gilead Sciences, Inc., for more information). In June 2023, we received a total upfront payment of $35 million for an initial two jointly selected research-stage programs. We determined that the Second Gilead Collaboration Agreement Amendment represented a separate contract and, at the amendment closing date, we allocated the transaction price of $35 million to the performance obligations created as of the date of this amendment. The following table summarizes the allocation of the transaction price to the distinct performance obligations (in millions):

Allocation to performance obligations Distinct Amount

Inflammation target 1 - R&D services * $ 18

Inflammation target 2 - R&D services * 17

Total allocated transaction price $ 35

We determined that we have separate performance obligations to perform R&D services for Gilead related to discovery and early development activities for each research program for which they have made an upfront payment. The standalone selling price of these obligations was determined using an expected cost-plus margin approach. We recognize the amounts allocated to these services as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the program. The options to acquire additional licenses or services did not result in additional performance obligations because they did not provide a material right at contract inception, primarily due to the very early stages of the programs.

We recognized revenue of $4 million for the year ended December 31, 2023, respectively, within Other collaboration revenue in our Consolidated Statements of Operations. At December 31, 2023, we had $31 million of deferred revenue remaining on our Consolidated Balance Sheet related to these performance obligations.

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Revenue from the Taiho Collaboration

Domvanalimab and Zimberelimab - R&D Services

In 2023, under the Taiho collaboration, certain clinical milestones for domvanalimab and zimberelimab were met through the STAR-221 study and Taiho became obligated to pay us $28 million, of which $14 million was paid the in the fourth quarter 2023 and the remaining $14 million is recorded in Receivable from collaboration partners at December 31, 2023 on our Consolidated Balance Sheet. We determined that we have a performance obligation to perform R&D services for Taiho related to the global development activities for the STAR-221 study in support of the Taiho Territory. We allocated the $28 million to this single performance obligation and recognize the amounts allocated to this service as the performance obligation is satisfied, calculated as an estimated percentage of completion based on management's estimated total effort for the programs.

We recognized revenue of $5 million for the year ended December 31, 2023 within License and development service revenue in our Consolidated Statements of Operations. At December 31, 2023, we had $23 million of deferred revenue remaining on our Consolidated Balance Sheet related to this performance obligation, allocated between current and noncurrent based on the expected timing of future recognition.

In early 2024, the clinical milestones for domvanalimab and zimberelimab for the STAR-121 study were met and Taiho became obligated to pay us $26 million. We have not recognized any revenue for this milestone for the year ended December 31, 2023.

Note 6. Income taxes

Income (loss) before income taxes included the following (in millions):

Year Ended December 31,

Foreign — 1 1

Income (loss) before income tax $ (301) $ (266) $ 55

The provision for income taxes included the following (in millions):

Year Ended December 31,

Current provision:

Federal $ 4 $ — $ 1

Total income tax expense $ 6 $ 1 $ 2

The reconciliation between the federal statutory income tax rate and our effective tax rate was as follows:

Year Ended December 31,

Federal statutory income tax rate 21.0 % 21.0 % 21.0 %

State taxes, net of federal benefit (0.7) % (0.1) % 0.8 %

Equity investment 0.4 % 0.9 % (4.1) %

Research and development credits 5.2 % 3.1 % (11.9) %

Change in valuation allowance (26.3) % (24.5) % (2.6) %

Stock based compensation (2.1) % 0.1 % (0.8) %

Non-deductible expenses and other 0.5 % (0.6) % 0.9 %

Provision for income taxes (2.0) % (0.1) % 3.3 %

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.

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Significant components of our deferred tax assets and liabilities were as follows (in millions):

Year Ended December 31,

Deferred tax assets:

Federal and state net operating loss carryforwards $ 1 $ 24

Research and development credits carryforwards 26 22

Stock-based compensation 21 16

Depreciation and amortization 3 6

Deferred revenue 66 19

Lease liability 26 25

Capitalized research and development costs 109 53

Total deferred tax assets 253 172

Deferred tax liabilities:

Right-of-use assets (20) (22)

Total deferred tax liabilities (20) (22)

Less valuation allowance (233) (150)

Net deferred tax assets (liabilities) $ — $ —

The accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of net deferred tax assets. We considered factors such as our history of operating losses, the nature of our deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible, including amounts that may arise under the collaboration agreements with Gilead and related program opt-ins. As a result of our evaluation of these factors, including the uncertainty that exists with respect to the option fees and milestone payments, we do not believe that it is more likely than not that the deferred tax assets will be realized. Accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying Consolidated Balance Sheets. The valuation allowance increased by approximately $83 million for the year ended December 31, 2023 and increased by approximately $67 million for the year ended December 31, 2022.

The United States enacted the Tax Cuts and Jobs Act in December 2017, which requires companies to capitalize all of their R&D costs for U.S. tax purposes, including software development costs, incurred in tax years beginning after December 21,2021. Beginning in 2022, for tax purposes we began capitalizing and amortizing R&D costs over a five-year period for domestic research and a fifteen-year period for international research rather than expensing these costs immediately.

At December 31, 2023, we have federal research tax credits of approximately $24 million that begin to expire in 2039. We also have state NOLs of approximately $21 million that begin to expire in 2035, and state research tax credits of approximately $15 million that have no expiration date, and foreign research tax credits of approximately $3 million that have no expiration date. Use of the U.S. federal and state NOLs and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S. tax law, as defined in IRC Sections 382 and 383, and similar state provisions. The annual limitation may result in the expiration of NOLs and credits before use. We have determined that an ownership change, as defined under IRC Section 382, occurred in previous years. While we do not expect these ownership changes to result in the expiration of net operating loss and credit carryforwards prior to utilization, we are subject to an annual limitation on the use of its tax attributes. The limitation on the use of net operating loss and credit carryforwards could reduce our ability to use a portion of the tax attributes to offset future taxable income.

We have not been audited by the Internal Revenue Service, any state or foreign tax authority. We are subject to taxation in the United States and in Australia. Due to net operating loss and research credit carryforwards, all of our tax years, from 2015 to 2023, remain open to U.S. federal and California state tax examinations. In addition, our fiscal years from 2019 to 2023 are open to examination in Australia.

Uncertain Tax Positions

We follow the provisions of FASB Accounting Standards Codification ("ASC 740-10"), Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement,

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presentation and disclosure in financial statements of uncertain tax positions that have been taken or are expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the Consolidated Financial Statements. The reserve for unrecognized tax benefits was approximately $13 million and $8 million at December 31, 2023, and 2022, respectively.

Due to the full valuation allowance at December 31, 2023 and 2022, current adjustments to the unrecognized tax benefit will have no impact on our effective income tax rate; any adjustments made after the valuation allowance is released will have an impact on the tax rate.

Interest and penalties related to unrecognized tax benefits are included in the provision for income taxes. There were no material interest or penalties accrued at December 31, 2023 or 2022.

The following table summarizes the activity related to our unrecognized tax benefits (in millions):

Year Ended December 31,

Beginning balance $ 8 $ 5

Additions for tax positions taken in prior year 2 —

Additions for tax positions taken in current year 3 3

Ending balance $ 13 $ 8

As of December 31, 2023, the total amount of gross unrecognized tax benefits was $13 million, of which, if recognized, none would impact our effective tax rate. We do not anticipate material changes to our uncertain tax positions through the next 12 months.

Note 7. Net income (loss) per share

The computation of basic net income (loss) per share is based on the weighted-average number of our common shares outstanding during the period. The computation of diluted net income (loss) per share is based on the weighted-average number of our common shares and dilutive potential common shares, which primarily include shares that may be issued under our stock option, restricted stock award, and Employee Stock Purchase Plans ("ESPP") (collectively, "dilutive securities") as determined under the treasury stock method.

The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share data):

Year Ended December 31,

Net income (loss) (Numerator):

Weighted-average shares (Denominator):

Less: Subject to vesting — — (1.0)

Weighted-average shares for basic EPS 74.0 72.0 69.3

Effect of dilutive securities — — 4.7

Weighted-average shares for diluted EPS 74.0 72.0 74.0

Net income (loss) per share

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The following table summarizes potentially dilutive securities excluded from the computation of diluted net income (loss) per share calculations because they would have been antidilutive (in millions):

At December 31,

Common stock options issued and outstanding 13.5 12.0 4.5

Restricted stock units issued 1.5 1.3 —

Employee Stock Purchase Plan shares 0.3 0.2 0.1

Total potential dilutive securities 15.3 13.5 4.6

We have also excluded the effect of Gilead's right to purchase additional shares of our common stock from the calculation as these rights had no intrinsic value at December 31, 2023, 2022 or 2021.

Note 8. Stock-based compensation

Stock-based compensation expense

The following table reflects the components of stock-based compensation expense recognized in our Consolidated Statements of Operations (in millions):

Year Ended December 31,

Research and development $ 35 $ 33 $ 29

General and administrative 38 32 26

Total stock-based compensation $ 73 $ 65 $ 55

As of December 31, 2023, unrecognized compensation costs related to non-vested stock option awards and RSUs totaled $73 million and $35 million, respectively, and is expected to be recognized over a weighted average period of 2.2 years and 2.4 years, respectively.

Stock Plans

We grant awards to employees and nonemployees under a series of equity incentive plans (collectively, the Stock Plans). Awards under our Stock Plans are made with newly issued shares reserved for this purpose.

2020 Stock Plan

In January 2020, we adopted the 2020 Inducement Plan (the "2020 Stock Plan") for the award of stock options and other equity-based awards as an inducement to eligible individuals to enter into employment with us. As of December 31, 2023, there were 3.2 million shares available for grant under this plan.

2015 Stock Plan and 2018 Equity Incentive Plan

In 2015, we adopted the 2015 Stock Plan, which in March 2018, we replaced with the 2018 Equity Incentive Plan (the "2018 Equity Incentive Plan"). Any outstanding awards under the 2015 Stock Plan that subsequently expire, lapse unexercised or are forfeited to us are added to the shares reserved for issuance under the 2018 Equity Incentive Plan. The number of shares reserved for issuance will automatically increase on January 1 of each year by a number equal to or the smaller of (i) 3.6 million shares, (ii) 4% of the shares of common stock outstanding on the last business day of the prior fiscal year, or (iii) an amount as determined by the board of directors. As of December 31, 2023, there were 3.8 million shares available for grant under this plan. On January 1, 2024, the number of shares available for issuance under the 2018 Equity Incentive Plan automatically increased by 3.0 million.

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Employee Stock Purchase Plan

In March 2018, we adopted the 2018 Employee Stock Purchase Plan (the "2018 ESPP"). The 2018 ESPP provides eligible employees with the opportunity to purchase shares of common stock through payroll deductions at a price equal to 85% of the lower of the fair market value per share on the first trading day of the applicable 24-month offering period or on the applicable purchase date. Employees are limited to a maximum purchase limit of 3,000 shares on each purchase date or $25,000 of shares purchased in a calendar year based on the stock price on the first day of the offering period. The 2018 ESPP is intended to constitute an “employee stock purchase plan” under IRC Section 423(b). The 2018 ESPP may be terminated by our board of directors at any time. The number of shares reserved for issuance will automatically increase on January 1 of each year by a number equal to or the smaller of (i) 1.1 million shares, (ii) 1% of the shares of common stock outstanding on the last business day of the prior fiscal year, or (iii) an amount as determined by the board of directors. As of December 31, 2023, there were 2.4 million shares available for purchase under this plan. On January 1, 2024, the number of shares available for purchase under this Plan automatically increased by 0.8 million shares.

Restricted Stock Units

We grant RSUs to our employees and directors under the 2018 Equity Incentive Plan. The RSUs vest annually or quarterly over four years for employees and annually for directors. The following table summarizes information regarding our RSUs for the year ended December 31, 2023:

RSUs forfeited or canceled (0.2) $ 25.70

The total fair value of shares at vesting date during the years ended December 31, 2023, 2022 and 2021 was $13 million, $12 million and $12 million, respectively.

Stock Options

The exercise price of stock options is set at the closing price of our common stock on the grant date, and the related number of shares granted is fixed at that point in time. Awards expire 10 years from the date of grant. The following table summarizes information regarding our stock options for the year ended December 31, 2023:

Options exercised (0.3) $ 10.08

Options forfeited or canceled (1.1) $ 29.26

During the years ended December 31, 2023, 2022 and 2021, the intrinsic value of shares exercised was $3 million, $26 million, and $17 million, respectively.

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Valuation Assumptions for Stock Options and Employee Stock Purchase Plan

We utilize the Black-Scholes pricing model to estimate the fair value of stock options and shares issued under our 2018 ESPP. The following table summarizes the key assumptions used to calculate the fair value and the resulting weighted-average grant date fair value of stock options granted:

Year Ended December 31,

Dividend yield 0% 0% 0%

Weighted average fair value of stock options granted $ 14.81 $ 20.75 $ 22.05

Year Ended December 31,